The recent Brexit vote has certainly created lots of uneasiness among not only people in the United Kingdom, but around the world. The event is complex and the repercussions are multifaceted. It is hard to talk about the complexity of it without getting bogged down in emotional tirades or mind-numbing detail.
What appears to be happening is that a major shift in the current economic/political/social structures seems to be underway. Since the 1980s, the twin forces of neoliberalism and economic globalization have expanded, and now hold sway in the West. Neoliberalism is the modern politico-economic theory favoring free trade, privatization, minimal government intervention in business, reduced public expenditure on social services, balanced budgets, free movement of labor, and others. Economic globalization refers to the increasing integration and expansion of the capitalist (neoliberalism and state) economy around the world. Trade, investment, business, capital, financial flows, production, management, markets, movement of labor (although somewhat restricted), information, competition, and technology are carried out across local and national boundaries on a world stage, subsuming many national and local economies into one integrated economic system. There is also a growing concentration of wealth and influence of multi-national corporations, huge financial institutions, and state-run enterprises.
These twin forces have shifted the economy to favor those at the top of the economic ladder, while the working and middle classes have either experienced stagnation or declining wages. For years, the backers of neoliberalism and economic globalization have been able to hold off complaints and protests about the inequality generated by these two forces, but it appears those on the “losing” end have made their voices heard. In the U.S., Donald Trump and Bernie Sanders have loudly voiced their displeasure with the status quo and the Brexit vote showed that a majority of the UK wanted to get out of the European Union and forge their own path.
The problem with any type of protests and calls for change, as this seems to be, is what kind of system will replace the current one. Of course, there seems to be wide disagreement on what that replacement should look like. Here lies the problem. Those on the right, represented by Donald Trump in the U.S. call for protectionist policies, cuts in immigration, closing borders, and heightened nationalism, while those on the left, represented by Bernie Sanders, call for more government programs, such as free college tuition, an increased minimum wage, spending for infrastructure, and higher tax rates on the wealthy. Although these programs may sound good to their followers, the repercussions of high tax rates or protectionist trade policies are unclear. Hillary Clinton, on the other hand, represents the status quo, liberal democratic policies with some tweaks.
To give some historical light to this debate I would like to insert an edited section from my book: The Global Economy: Connecting the Roots of a Holistic System that explains similar economic upheavals that took place in the beginning of the 20th century. It is worth reading because of the eerily similar situation as today.
The First Golden Era of Global Capitalism (1896-1914)
The years from 1896 to 1914 were the first high point of global economic integration. The world had never seen such an open market for goods, capital, and labor. It would be another 100 years before the world returned to that level of integration. For those who benefited from this early economic globalization, it worked beautifully. Those who were able to capture the comparative advantage of their country benefited. Labor and capital moved around the world from where they produced less to where they produced more. Profits were astonishing.
But not everyone benefited from global economic integration. On the destructive side, small farmers in Europe were driven out of business because they were unable to compete with large farmers in the U.S. and Argentina. A few of those on the losing side of specialization and economic integration included European grain farmers, Chinese artisans, and Indian textile weavers. Opening markets, paying back debts, and following the gold standard all involved sacrifices, which the poor and weak paid for.
In 1900, the homeland of the Industrial Revolution was being left behind. Industrial leadership was slipping away from the British to the new industrial titans—Germany, the U.S., and Japan. In 1870, Britain, Belgium, and France together produced nearly half of the world’s industrial output, but by 1913, they were producing barely one-fifth. German industrial output was more than Britain’s, and America’s was more than double Britain’s. The U.S. introduced methods of mass production, while the Germans made advances in electrical engineering and chemicals. A shift in core areas was underway.
The British had held their core status since the 1700s. Their golden age stretched from 1846 into the 1870s, during which international trade jumped fivefold. After 1900, the U.S. and Germany made exports from Britain more expensive for consumers by adding tariffs. The decline in British exports affected the wages of its workers, which dropped by about 10 percent. By 1914, women in Britain constituted 41 percent of the workforce because families needed two incomes to make ends meet. The U.S. would experience this trend in the late 1970s.
As the British continued their decline, more wealth went to the top 1 percent. Their share of wealth peaked in 1911-1913 at 69 percent. The lifestyle of the upper class was a whirl of showy consumption, as the elite purchased huge yachts, attended pheasant shoots, and vacationed in luxury hotels. Similar to the situation in the U.S. today, some British wanted to revive manufacturing, but instead finance and the concentration of wealth continued. With the collapse of British world economic leadership, the share of wealth in the hands of the top 1 percent declined from 69 percent in 1914 to 33 percent in 1960.
The Early Twentieth Century Economy (1914-1945)
Before 1914 the benefits of international economic growth were available only to some of the people some of the time. But almost everything from 1914 to 1945 was bad for almost all the people all the time. During this time the world staggered around a vicious circle in which global economic collapse caused national crises, and national hardships drove domestic groups to extremes.
At the end of World War I in 1918, the negotiations between the war’s victors and the defeated took a nasty turn. The victors demanded that Germany admit guilt for causing the war and pay them compensation. The victors refused to renegotiate the large war debts, eventually contributing to the collapse of the fragile German democracy and the rise of the extreme Nazi Party and Adolph Hitler.
One notable event during World War I was the decisive German defeat of the Russian army. The weak Russian monarchy gave way to a Communist uprising in 1917. Those favoring the monarchy and victorious communist’s supporters battled each other in a brutal civil war. The Soviet Union formed in 1922. They championed a command economy, which continued until its collapse in 1991. After the revolution, the country industrialized and collectivized agriculture. The heavy boots of the communist elites stamped out the infant free market.
With the end of World War I, an uneasy peace settled upon Europe, and economic turmoil prevailed. In an attempt to control the unrest, governments printed more money, causing inflation to spiral out of control. It was the worst in Germany where it was common to see people pushing wheelbarrows full of cash just to buy a loaf of bread. This was inflation at its worst, wiping out the life savings of millions of people. Despite hardships, by 1924 most of Europe had recovered from inflation and the war. But to the German middle class, who lost most of their savings because of inflation, the chaos of the early 1920s showed that the liberal democratic elites were unfit to rule. In light of this backdrop, Hitler’s anti-democratic message was appealing to them.
The European middle class was squeezed again as large corporations came to dominate industry, and farming was modernized. Almost every European extreme right wing movement found its main base of support among small business people and small farmers. Fascism had an anti-corporate, anti-labor, and anti-foreign message. Farmers and businessmen in some nations where there were many Jewish-owned businesses or merchants identified with the European extreme right wing anti-Semitic views, since they saw Jewish competitors, creditors, or middlemen as part of the problem.
The U.S. was the world’s largest economy in the 1920s and continued its protectionist trade policy. One of the high profile industries was automobiles. The assembly line installed in Henry Ford’s Highland Park, Michigan plant in 1913, reduced the time necessary to make a Model T chassis from over 12 hours to 90 minutes. Labor’s strength grew as industry shifted to large corporations and factories, such as Ford Motors. The new corporations were friendlier to unions than older, smaller firms. Labor was a higher part of production costs in older, labor-intensive industries than in the newer, larger factories. Also, tariff policies meant that prices would not face competition from imports; thus, labor costs were passed on to consumers in the form of higher prices. The growth of unions and large corporations went hand in hand.
On Black Tuesday, October 29, 1929, the U.S. stock market collapsed. It was a clear signal that the Great Depression was at hand. The economic collapse of 1929-1934 was severe. The industrialized world crumbled for over five years as unemployment went above 25 percent almost everywhere. In the U.S. farm prices fell by 52 percent between 1928 and 1933. In response, U.S. conservatives in Congress raised tariffs with the passage of the Smoot-Hawley Tariff Act in 1930, and within a few months other countries also began raising tariffs. The high tariffs put a further damper on international trade.
Deflation, a decline in prices and wages, was a major problem in the Great Depression. A country’s commitment to the gold standard blocked attempts to combat deflation. Gold ruled. Countries on gold had to let prices take their course, for national prices were a local expression of world prices, and world prices were low – very low. Lending nearly stopped as credit markets tightened. The British government took its currency off gold in 1931. President Franklin Roosevelt took the dollar off the gold standard when he came into office in 1933. As a result, the dollar declined in value, causing the prices of agricultural products and other primary commodities to soar. With more money in circulation, prices rose continually, and deflation eased.
The Depression left its mark everywhere, and it pointed away from neoliberal capitalism and toward government involvement in the economy. The Western countries had become more democratic since the classical era, and labor, the middle class, farmers, and the poor, who bore the burden of earlier policies to stabilize the economy, were no longer willing to make that sacrifice.
The Rise of Economic Nationalism
While Western democracies sought to rebuild global economic integration in the face of economic collapse, the fascists and much of the world looked to protect themselves from it through a policy of economic self-sufficiency. The democracies worked with organized labor, while the fascists destroyed their labor movements and ties to socialism. Germany cast off global capitalism after 1929, and instead, the government built public works projects. Its plans needed a strong government, and the Nazis and their supporters gladly turned away from the weak governments of classical, capitalism.
Many middle status, semi-industrial, debtor countries moved along an economic path that was often at odds with that of the core countries. They, like the fascists, followed a new economic nationalism and rejected the gold standard, levied high protective tariffs, and controlled foreign investment. They built urban industries that produced goods for their domestic market, although not for export. Their previous areas of specialization, such as agriculture, funded sectors of the economy that the market had not developed because of foreign competition, especially national industry. For example, Argentina taxed its well-established agricultural sector to fund its infant national industrial growth policy.
After 1928 in the Soviet Union, Joseph Stalin and his communist supporters consolidated their power. They began pushing the country toward rapid industrialization, with resources squeezed out of the agricultural and consumer sectors. The Soviet regime forced peasant farmers into government controlled collective farms. The small-to medium-sized farmers resisted forced collectivization. Although Soviet industrialization was a success in many ways, the government’s supporters – urban workers and Communist Party members – received most of the benefits, while farmers suffered.
Africa, Asia, and Latin America were economically cast aside from the global economy from about 1929 to 1953. In this period, the middle nations broke from their open economy pasts to a model based on import substitution industrialization (ISI). Under ISI a country manufactures its own products and reduces its dependency on foreign trade. Many Latin American countries adopted ISI from the 1930s until the 1980s, and some Asian and African countries followed from the 1950s until the 1980s. Cities and industries grew in areas of Latin America and the Middle East. For example, Egyptians, who had exported raw cotton to Britain for decades, used their own cotton to make clothing textiles, and soon a busy, tariff-protected industry sprouted up.
Building a Social Democracy
In the middle 1930s, the Western democracies began to shift the elite-favoring policies of laissez-faire capitalism to social democracy. It was a clear alternative to fascism and communism, which were firmly in place by the late 1930s. A social democracy is where a country has some government management of the economy, safety net provisions, such as social insurance and social security, and labor rights. Every industrial nation developed similar social plans. Even the U.S., a country that boasted of rugged individualism as its core principle, turned to a limited social democracy. These benefits freed people from the worries of a modern, capitalist society and cushioned the cruel booms and busts of the market place.
Corporations in the social democracies of the 1930s largely backed the democratic reforms. They quickly realized that their contributions to unemployment, pension programs, and social insurance did not affect their competitive advantages, since other Western nations were doing the same, and there was limited global competition at this point. Especially during the 1930s, many corporate leaders came to support, or at least not to oppose, social reform.
The classical economic order (like neoliberalism today), based on the gold standard and limited government, was swept away on all fronts during the 1930s. The British economist John Maynard Keynes helped shape the shift from laissez-faire capitalism to social democracy and managed capitalism. He thought governments should take action in the economy to soften the boom and bust cycles of capitalism. Keynesian policies were important in the Western democracies, and these countries adopted them from the 1930s to the 1970s.
The economic systems of the world – social democratic capitalism, communism, and fascist self-sufficiency – clashed on the global battlefield of World War II (1939-1945). The world had never seen a war of such global scope and horror. At the end, the defeated fascist economies lay in ruins, while the Allied victors promoted their favored economic forms: communism and social democratic (managed) capitalism. The world roughly divided into these two camps.
Today, Europe clings to the social democratic policies of the 1930s with a generous social safety net, but it also competes with countries practicing neoliberalism, such as the U.S., that has seen a fraying of the social safety net. State capitalism, a carryover from communist command economies, continues in China, Russia, Saudi Arabia, and elsewhere. Perhaps the Brexit vote will mean a move to more nationalistic, protectionist economies, reminiscent of the ISI economies in the 1950s and 1960s.
I favor an economy that is more local, self-sufficient (at least in food) and run by small business people. Global trade can continue but with country to country trade agreements that take into account labor and environmental protections. With government policies that favor small instead of big, perhaps this can be a model for the future.
- Why didn’t laissez-faire policies work to end the Depression?
- What were the alternatives to laissez-faire capitalism in the 1930s? Why did they emerge?